Question

Assume a hypothetical economy with the following information. (Show all the necessary working to obtain full marks).

Y=E

Autonomous expenditure = 3500

Equilibrium income = 9800

Full employment level of income is = 14000

i. Illustrate the above using a well labelled diagram.

ii. What is the value of the multiplier in this economy?

iii. Give the equation of the aggregate expenditure line.

iv. What level of autonomous expenditure is required to get this economy to its full employment level?

Answer 1

Illustration of the above using a well labelled diagram.

What is the value of the multiplier in this economy

Y_e = 9800

$Ye = \alpha z$

$z =$ autonomous expenditure

$9800 = \alpha 3500$

$\alpha = \frac{9800}{3500} =2.8$

Equation of the aggregate expenditure line

first we must find the marginal propensity to consume, as illustrated below;

$\alpha = \frac{1}{1-C}$

C is the MPC.

$2.8 =\frac{1}{1-C}$

$C=0.6$

The equation of the line is therefore;

$Y = 3500 + 0.6Y$

Note: The G and I are not given

Level of autonomous expenditure required to get country to its full employment level

Full employment level of income$= 14000$

$Y = 1400$

$C = 0.6$

$14000 = Z+ 0.6(14000)$

$Z = 5600$

The new autonomous expenditure $= 5600$